Business Support for a Leasehold Property
Background
Licensed Developments Ltd (LD) was asked by a leading high street bank through an IP to offer a Business Support package to the Lessee of a Public House in Greater London. The Pub was leased from one of the major Pub groups and, having recently entered into an IVA, the lessee (a sole trader) was looking to put his business on a sound footing.
The property is a well furnished, London style Pub/Bistro in a good area of south London on a busy high street with some reasonable competition. The business was wet led but the owner was making strenuous efforts to grow his food operation and increase occupancy of his seven bed and breakfast rooms.
The Pub drew its business from the local community and was increasingly focussing on the young urban professional market. Regular live entertainment and a calendar of themed events helped to drive efforts to attract a younger clientele with a good level of disposable income.
Key Financial Issues :
While the owner had employed a bookkeeping and accounting service at the request of his landlord, he admitted that he rarely read or understood the 12 page report that was sent to him every month. As a consequence, he was not in a position to measure and manage his business effectively.
LD impressed upon him the critical need to use his monthly P&L as the key tool in controlling his business and suggested that a shorter and clearer accounting format might help. This could either be briefed out to the incumbent accounting service or LD could put in its own team to develop an appropriate format.
Although he had succeeded in increasing turnover by more than £100k in the eighteen months since he had taken on the pub, his inability to control expenditure meant that he had made significant losses. As a result, his creditor list had increased to the point where an IVA was the only way to avoid business failure.
Operational Action :
Following a period of assessment of the business and analysis of its accounts, LD put together a plan which was designed to return the business to a break even operation within three months and to a profit making concern within the following quarter.
- Bookkeeping and Accounting: The leaseholder decided to change his accounting arrangements and LD therefore brought in its own team to quickly develop bookkeeping procedures, produce simple P&L reports, establish cash flow controls and prepare monthly budgets.
- Turnover: The property enjoyed good turnover but the business split was too heavily skewed in favour of wet (67%) to justify the staff numbers devoted to food preparation and service (23%). Accommodation (10%) was deemed to be too low to justify the large capital investment in this part of the business over the previous twelve months. Clear objectives were put in place to increase food to 30% of turnover and accommodation to 15% (60% occupancy) within six months.
- Gross Profit: These were generally good but had room for improvement particularly as regarded wines and spirits. Prices were analysed and GP’s compared with those that could be achieved through LD’s preferred supplier. Menus were analysed and agreement reached with the owner that there should be an emphasis on providing a simple and tightly targeted Bistro menu to suit the clientele of the area.
- Wages: Immediate pressure was brought to bear on wage costs (including the owner’s drawings) which were high at 31% of turnover. All rotas etc were looked at to see where savings could be achieved. An adjustment was made in the kitchen with the employment of a new the head chef on a lower salary and also lived out (thus freeing up another room for letting). A clear objective was set to reduce wages to 25% of turnover within two months and particular scrutiny applied the owner’s drawings.
- Entertainment: Although this was a significant driver of turnover, measures were put in place to analyse the viability of every event at the pub.
- Fixed costs: LD identified a major problem with a Utility supplier and passed the details and information to its Utilities co-ordinator to solve. Via its preferred supplier network it also introduced a new card processor and telephone provider. In addition, it undertook an analysis of all equipment rental agreements to ensure that the best finance rates were being obtained.
- Marketing: Although the owner had retained a PR company and was very active with his marketing, a twelve month plan was established to ensure spending was being channelled in the right direction and that lead times were adhered to (e.g. production and distribution of Christmas brochure/menu).
LD produced a Profit and Loss account within 15 days of the end of each month and then immediately met with the owner to discuss the performance of the business, analyse the ratios achieved, further discuss reductions in fixed costs and set targets for the following period.
Outcome (ongoing :
Before LD arrived, the business, although performing satisfactorily in terms of turnover, was losing in the region of £4k per month. Having put stringent wage and cost controls in place, it was able to reduce losses by 50% in the first month, 50% again in the second month and was on track to assist the pub in breaking even by the end of the third.
Food and accommodation were steadily achieving their target shares of the overall business and, most importantly, the wage percentage was clearly controlled, producing very important savings to the bottom line.
LD’s scrutiny of the Pub’s fixed costs identified significant economies via its preferred supplier base, most notably:
- Utilities - circa £4000 per annum
- Card Processing - circa £2500 per annum
- Telephone - circa £600 per annum
With LD’s continuing input, the business was projected to return to profit over the following quarter. It continued to insist that owner adopt the very strictest of principles of good licensed trade management and impressed upon him that this was the only way to ensure that he would avoid repeating the mistakes that led to his IVA.
